Intrinsic value calculator: Graham's formula for what a share is worth

Intrinsic value is what a share is worth based on the business behind it, as opposed to what the market happens to be charging for it today. This calculator uses Benjamin Graham's revised formula, the simplest serious attempt at the question and still the most widely used starting point.

Enter the trailing earnings per share, the growth you expect over the next seven to ten years, and the current AAA corporate bond yield. Add the market price and it returns the margin of safety, which is the discount you are being offered against your own estimate.

Benjamin Graham introduced the idea in Security Analysis in 1934, and the argument has not changed since: a share is a claim on a business, so its value comes from what that business earns, not from what the last buyer paid.

The market price and the intrinsic value are two different things that occasionally coincide. Value investing is the practice of buying when the price sits meaningfully below the value, and waiting for the two to converge.

The word "intrinsic" oversells it slightly. No formula recovers a true value that exists independently of opinion. What a formula gives you is a disciplined estimate, built from stated assumptions, that you can compare against a price. The discipline is the product.

The original version, from 1934, was simply:

V = EPS × (8.5 + 2g)

Where V is the intrinsic value per share, EPS is trailing twelve-month earnings per share, 8.5 is the price-to-earnings ratio Graham considered appropriate for a business with no growth, and g is the expected annual growth rate over the next seven to ten years.

Graham later revised it to account for interest rates, because the value of future earnings depends on what safe alternatives pay:

V = EPS × (8.5 + 2g) × (4.4 ÷ Y)

The 4.4 is the yield on high-grade corporate bonds in 1962, when he wrote the revision. Y is the current AAA corporate bond yield. The ratio between them adjusts the whole valuation for the rate environment: when yields are low, the multiplier rises and shares are worth more, and when yields rise, it falls.

Then the margin of safety, comparing your estimate to the market:

Margin of safety = (Intrinsic value − Market price) ÷ Intrinsic value

A company earned $23 per share over the last twelve months, is expected to grow at 10% a year, and the current AAA corporate bond yield is 3.7%.

V = $23 × (8.5 + 2 × 10) × (4.4 ÷ 3.7)

V = $23 × 28.5 × 1.189

V = $779.51

If the shares trade at $500:

Margin of safety = ($779.51 − $500) ÷ $779.51 = 35.86%

A 36% discount to the estimate, which sits comfortably inside the 20% to 50% band value investors typically require before buying.

Now look at what that valuation implies. Dividing $779.51 by $23 of earnings gives a price-to-earnings ratio of 33.9. The formula has just told you that a business growing at 10% deserves to trade at nearly 34 times earnings. That is a demanding conclusion, and it comes entirely from the interest rate term. The calculator reports the implied P/E for exactly this reason: it is the fastest way to sanity check what the formula has done.

The formula's simplicity is its appeal and its problem. Three fixed numbers carry the whole thing.

The 8.5. Graham's view of what a no-growth business should fetch. It is a judgment from the 1930s and 1960s, not a derived quantity.

The 2. Doubling the growth rate is generous. At 15% expected growth it produces a P/E of 38.5 before any rate adjustment, which is a valuation most investors would not defend for a business growing at 15%.

The 4.4 divided by Y. In a low-rate environment this term inflates every valuation dramatically. At a 2% bond yield, the multiplier is 2.2, and the formula values every share at more than double what it would at Graham's own baseline.

This is why many practitioners substitute 7 for the 8.5 and 1 for the 2. Running the example above with those constants gives $464.97 instead of $779.51, an implied P/E of 20.2 instead of 33.9, and a margin of safety that has vanished entirely at a $500 price. Same business, same earnings, same growth, opposite conclusion.

The calculator lets you change both constants for this reason. If your buy decision flips between the two settings, you do not have a buy decision.

Graham's most durable contribution is not the formula. It is the insistence that you should never buy at your estimate of value, only meaningfully below it.

The logic is about error, not greed. Every input to the calculation is uncertain. Growth might disappoint. Earnings might be inflated by a one-off. Rates might move. A margin of safety is the buffer that lets you be wrong about several of those and still not lose money.

Typical practice puts the required discount between 20% and 50%, wider for businesses with less predictable earnings and narrower for the most stable. The rule is not that a large margin makes a good investment. It is that a small margin makes a fragile one.

It is calibrated to a different era. Graham worked in a market of industrial businesses with tangible assets and stable earnings. Applying his constants to asset-light software companies is a category error.

Growth in, growth out. The entire answer is driven by an estimate of growth over seven to ten years. Nobody forecasts that reliably, and the formula multiplies whatever you enter by two.

Trailing EPS is fragile. A single year's earnings can be distorted by write-offs, disposals, tax items, or an unusually good cycle. Normalised or averaged earnings give a steadier base.

It ignores the balance sheet entirely. A company with net cash and one with heavy debt produce identical values if their earnings match. They are not identical investments.

It ignores dividends and buybacks. Cash returned to shareholders is real value that the formula does not see.

Low rates break it. Because the rate term sits in the denominator, a very low bond yield inflates every valuation. In a near-zero rate environment the formula will tell you almost everything is cheap.

Using Graham's revised formula, multiply earnings per share by 8.5 plus twice the expected growth rate, then multiply by 4.4 divided by the current AAA corporate bond yield. With $23 of EPS, 10% growth, and a 3.7% yield, the result is $779.51 per share.

Most value investors look for somewhere between 20% and 50% below their estimate of intrinsic value, with wider margins demanded for businesses whose earnings are harder to predict. The margin exists to absorb errors in your own assumptions, not to guarantee a return.

It was never intended as a precise valuation, and it is best understood as a screening heuristic. Its constants come from a mid-twentieth-century market of industrial companies, and the interest rate term inflates values considerably when yields are low. Use it to shortlist, then value properly.

Market price is what the share currently trades at. Intrinsic value is your estimate of what the underlying business is worth. Value investing is built on the observation that the two diverge, sometimes for years, and eventually converge.

Because shares compete with bonds for the same capital. When safe bonds pay well, investors demand more from equities and pay less for the same earnings. Graham's revision divides by the current yield to capture that relationship.

Graham used 8.5, and many modern practitioners prefer 7 with a growth multiplier of 1 instead of 2, which produces substantially lower and more defensible valuations. Run both. If your decision changes between them, the margin of safety is not wide enough to act on.

Yes, and that gap is the entire point of the exercise. A value above the market price is what value investors call an undervalued stock. A value below it means the market is charging more than your assumptions justify.